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Canada’s pokey economy is upsetting the tummies of the nation’s chartered accountants. Only 39% of those answering a national survey expressed optimism about the next 12 months. That’s down by 18% three months ago. And September numbers for manufacturing shipments likely had them grabbing the antacids. Statistics Canada reported a 0.6% decrease with 13 of 21 industries registering lower sales.

You’d think manufacturers have reason to be more pessimistic than the number crunchers. The sector shrank by 28% last year with more than 185,000 workers losing their jobs. Plants have recovered about 45% of their production, but are still off pre-recession levels by 18%, so it’s too soon to break out the party hats.

The survey of 384 senior manufacturing executives from across Canada – most of them leading small to medium-sized companies – are concerned about economic conditions, but expect orders and sales dollars to increase, as will prices and profits.

They see the economy picking up over the next three years so they’re preparing for expansion with plans to hire employees and invest in process improvements, facilities, technology, training and innovation.

Statistics Canada has just released the results of an innovation and business strategy survey for 2009 that reports only 18% of Canada’s enterprises focus on new or significantly improved products. More than 77% prefer maintaining or expanding the sales of existing goods and services.

The “experts” are pushing innovation as key to winning in the new global economy where winners must be agile, imaginative and responsive to rapidly shifting market dynamics. They have a point.

A comprehensive Canadian Manufacturers & Exporters (CME) study of product design and development shows winning innovators derive more than 35% of their revenues from new or significantly improved products, and do so because they invest more than the laggards in R&D, commercialization and market research.

The PLANT survey shows SMEs are on the right track, but they have some work to do. Although they consider innovation to be an important part of the game plan, they identify quality as their top competitive advantage. Innovation appeared well down the list.

Manufacturers are investing in research, development and commercialization of new products, but 49% are not taking advantage of the SR&ED tax credit offered by the federal government and 24% are unaware of any financial incentives.

Clearly, SMEs need some help getting to the next level. CME president and CEO Jayson Myers wants governments to improve the investment environment by leaving more cash in manufacturers’ hands. Federal budget time is coming up. The CME is encouraging the Harper government to acknowledge the direct relationship between cash flow and investment in innovation by extending the write-off for machinery and processing technologies, and to make the SR&ED tax credit refundable.

That might be a bit of a hard sell to a cash-strapped, minority government wallowing in deficit, but Stephen Harper and friends would be wise to consider the impact a floundering manufacturing sector has had on the economy during the past two years.

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